December 4, 2017
Treasury yields moved higher last week and mortgage yield spreads were slightly wider versus Treasuries, but remain historically tight. Mortgage rates rose and mortgage applications fell from a 7.7% drop in refinance activity, which has fallen ten of the last twelve weeks to historically low levels. The FHFA announced the new baseline mortgage conforming loan limits for 2018.
- Mortgage yield spreads were unchanged to slightly wider last week:
- 15-year and 30-year MBS yield spreads ended the week unchanged to 1bp wider to Treasuries and swaps.
- Curve slope measured by 2- and 10-year Treasuries flattened 1bp last week from 59bps to 58bps.
- Investors were active last week in 15yr MBS, primarily in seasoned 3.0% and newer 3.5% coupons, which offer attractive yields and spreads in the sector.
- Investors were also active in seasoned 30yr MBS with 3% to 4% coupons.
- A combination of higher yield versus agency bullets and deference to convexity inspired activity in seasoned 5yr and new 7yr multi-family FNMA DUS.
- The FHFA announced the new baseline mortgage conforming loan limits for 2018, which increased 7% to $453,100 from $424,100 (for 1-unit properties). The 2017 limit increased 1.7% from $417,000, which was the limit from 2006–2016. The baseline limit for Alaska, Hawaii, Guam, and the Virgin Islands remains 50% higher, increasing to $679,650. The maximum loan limit for high cost areas (the “jumbo conforming” limit) is also 50% higher than the baseline; $679,650. Loans larger than these limits are ineligible for acquisition by the GSEs.
CMO spreads tightened in various types of structures last week, while activity in CMOs slowed compared to recent levels, which has been elevated over the past month. Investor focus was primarily in shorter PAC structures offering extension protection and approximately 2.5% yield and 2.5-year average lives. Full coupon front sequential structures off of 30yr 3.5% collateral (“3.5 squared”) remained popular with financial institutions with wider spreads and was in better supply than many shorter structures. Odd lot cleanup activity has also increased as investors approach year-end.
Mortgage Rates and Refinance Activity
- Mortgage rates rose last week to levels close to their respective YTD averages.
- 15-year mortgage rates rose 3bps to 3.16%, 6bps above the YTD average 3.10%.
- 30-year mortgage rates rose 7bps to 3.87%, 2bps below the YTD average 3.89%.
- 15- and 30-year fixed mortgage rates have fallen 8 and 19bps year-to-date.
- Mortgage applications fell last week, the first decline in activity since November 3rd. Applications for the week ended November 24th fell 3.1%, driven lower by a 7.7% drop in refinance activity, offset by an increase of 1.8% in purchase activity.
- The MBA Refi Index fell 7.7% to 1205 (YTD avg. 1350) and continues to be historically low and range-bound, holding far below levels of 2016. The Index reached a year-to-date high the week ending September 8th at 1637; however, the Refi Index has fallen ten of the last twelve weeks.
Housing related data released last week was generally strong and higher than expectations.
- S&P Case-Shiller’s 20-City Index rose 6.2% YoY in September, the fastest pace since July 2014
- Construction spending in October showed the biggest gain in five months, increasing 1.4% MoM
- New home sales rose 6.2% (exp. -6.3%) to a better-than-expected 685k annualized unit pace, a new ten-year high. New sales rose 40k for the month including a 13k increase in the Northeast (+30.2%), a 12k increase in the Midwest (+17.9%), a 10k increase in the West (+6.4%), and a 5k increase in the South (+1.3%). While the median price fell from $324,900 to $312,800, the average price rose $19,100 to $400,200. The divergence between the median and the average illustrates the strength in pricing for upper-end homes, at least in part a result of record-high stock prices and the resultant boost in net worth and homebuyer confidence. Questions raised by the recent trends include affordability, and durability of the housing gains if stock prices were to reverse. From a GDP perspective, after just one month of data, new sales in 4Q are 16% above the average monthly pace in 3Q.
- Pending home sales in October increased 3.5% topping estimates after activity in the South rebounded from storm-driven weakness. The Chief Economist for the National Association of Realtors said about the report that “Home shoppers had better luck finding a home to buy in October, but slim pickings and consistently fast price gains continue to frustrate and prevent too many would-be buyers from reaching the market.” In the October existing sales report released a week ago, inventories fell on a YoY basis for a 29th consecutive month and the months of supply dropped to its lowest level for an October on records reaching back to 1999.
Dan Stimpson, CPA
Senior Vice President